SaaS Talk™ with the Metrics Brothers - Ray "Growth" Rike & Dave "CAC" Kellogg

Welcome to the pilot episode of SaaS Talk with the Metrics Brothers, Growth and CAC. Growth, introduce yourself.

Well, I'm Ray Reich and I'm all about growth.

And I'm Dave Kellogg and I'm all about CAC, customer acquisition cost.

Well, let's be honest, actually we're both about everything when it comes to SaaS companies and SaaS metrics.

That's true, Ray. So why don't you tell the good audience why we decided to do this thing?

Well, Dave, it was your idea.

No, no, no, Ray, don't, don't weasel out of this. It was yours.

Okay, well, number one, I wanted to do a podcast with you, Dave, because I thought we could do something a little bit different, and that is Talk about the business process and the insights that metrics give us versus just talking right about the metrics.

And thus a star is born.

But Dave, why'd you agree to do it with me?

Well, first, Ray, I felt kind of sorry for you all alone up there in Schenectady calculating SaaS benchmarks and writing SaaS definitions and metrics.

Oh, wait a minute. It's not Schenectady. I did move out of California, but I moved to New York City, and If we want to be precise, because I know you like being precise, Dave, it's actually the Upper East Side of Manhattan.

Oh my, that's quite a difference from Schenectady, in fact. But Schenectady sounds much better and is way harder to spell when they try to sue us. So our legal mailing address is in Schenectady.

Who'd want to sue somebody just for doing SaaS Talk? But you avoided my question. Why are you doing this podcast with me, Dave?

Okay, okay, Ray. Look, I wanted to do this because I thought It would be a good chance to basically do what you said, to go beyond calculation. Look, we both do calculations. We both care about calculations because we don't want to talk about things when we're comparing apples and oranges. But we also don't like to stop at the calculations, right? We like to go beyond them and discuss meaning. And I thought we'd have some good back and forth on these things, because just working with you on some of the definitions and metrics, I, I know we're, we're more like 80% aligned than 100%. So I think that'll leave some room for some good debate.

But it's that 20% we're not totally aligned, I think, will be really interesting for the audience. Because often I'll walk away from a conversation, Dave, and say, oh, I hadn't thought about it quite like that. But one of the things that I'm doing is I'm a co-founder of the SAS Metrics Standards Board. And this podcast will be a great complement to all that nitty-gritty standards work that we're doing. And well, I think you're an advisor, aren't you? I'm not sure I see you too often.

I am an advisor, Ray. I do leave you comments in the Google Docs, and we can talk offline, I guess, about whether sales commissions should be accelerated in calculating the CAC ratio. But it's just not top of my list right now.

Well, we can tell you're coming back from vacation, Dave, because that whole commission acceleration thing, we've already done that. And the answer is yes, we are accelerating them.

Uh-oh. Let's not go down the rabbit hole, Ray.

Well, then let's get into today's topic, and that is expansion ARR. The Metrics Brothers is proudly sponsored by Benchmarkit, the B2B AI and software industry's largest, broadest, and most contextualized benchmarking index. Dave Kellogg and Ray Groth Wright have put the Metrics Brothers podcast on hiatus for the remainder of 2026. All episodes we have ever recorded are still available on your favorite podcasting app. You can reach Dave @Kellogg and Ray on LinkedIn @RayReich. Thank you so much for listening to the Metrics Brothers podcast. What do you think about the, the focus and everyone talking about expansion ARR today, Dave?

Well, I mean, I think it's good and it's bad. I mean, it's good because we can go get it. It's bad because I think everyone's having a hard time finding new ARR.

Ah, so we can't find new ARR, so let's go back to the existing customers and see if there's any blood in that turnip. But Before we talk about that, let's define what is expansion ARR from your perspective.

Yeah, it's a good point because we can't define expansion without first defining new, right? We need to know the 2 types, one type and the other type. And I think it's— first, it can be a little bit deceivingly hard. New ARR to me is the generic term that encompasses 2 halves, new ARR from new customers, which a lot of people call new logo ARR or new biz ARR, and then new ARR from existing customers, which people might call expansion ARR. So to me, that's the difference. And the gray zone in between are these land and expand business models where you land in February with 10 units, but you predictably grow to 40 by March, right? So it's a fast land and expand. And that to me, is that 30, is that new? Do I consider that kind of a delayed land or is that expansion? No, no, I landed at 10 and 3 months later I expanded to 40. That's a tricky question.

It is. In fact, it's one of the things that we took on with the SAS Metric Standards Board. And there's a guy out there named Todd Gardner who's on the board and he's like, oh, that's ramp revenue. I'm like, no, no, no, no. Is it expansion or is it new? Now you give me a third category. Just too much, Dave.

Yeah, I've heard it called organic. I mean, everyone's developing their own name for it. That, that what happens between the 10 and the 40 in my example? Is that new? Is it expansion or is it something else? Now, Ray, now that I've tried to define expansion ARR, why don't you tell me how much a company should have?

You know, this is a little bit like the CAC payback period. Well, everyone knows it should be 12 months. Not necessarily. So in fact, I just am in the middle of doing our 2023 benchmarking research, Dave. And where most people say, well, traditionally, once you get to $10 to $20 million, you should have 70% of your new growth from new name customer acquisition and 30% from expansion. What's amazing thus far over the last 6 months, it's 44% of new ARR is coming from expansion, Dave, and only 56% from new.

Yeah, that's, that's higher than, than what I call my rule of 30. We all know the rule of 40 for mixing growth and profit. But one of the more consistent ratios I've seen is expansion ARR as a percentage of new ARR. And in my experience, that runs around 30. Now, it doesn't surprise me, Ray, that given the current times, it's edged up now to 44, because that's how we started the podcast. People are having trouble finding new logo ARR. They want to make the new ARR number, so they're pressing harder on the customers.

Yeah, but there's something, Dave, that I think is really important, and you got to understand your company profile. If you're a single product company with a single primary user, this expansion ARR is much more difficult. But if you're a multi-product company with 5 products and you can sell some to IT and some to marketing and some to sales, your expansion ARR is just inherently going to be higher. So you've got to understand and benchmark yourself against companies like yours.

Yeah, totally agree. I mean, this is one of the downsides of benchmarks, and I know how dear benchmarks are to you and RevOps Squared. They're dear to me too. But sometimes VCs and board members can look at the benchmark and try to force fit it and say, how come expansion isn't 40%? It's like, well, we only have one edition. We price by user in a slow-growing department. And, and there is no second product to sell. So, so that's why, right, there's no expansion opportunity. Now, we could argue that company should maybe make a second product or repackage their product into multiple editions. But, but, but yes, expansion ARR needs to be linked overall to the business model.

It reminds me of a board meeting I was in once. It's like the Goldilocks story, right? We were talking about our expansion versus new ARR mix, and one board member said, well, I think your expansion ARR should be a little higher. And then another one said, no, I think it should be a little bit lower. And I looked at him and I said, you know, based upon my experience, I think we're just about right. So I must be the middle bear.

There you go. No, I think it's an important point, right? Which is if you have too much of this, too much expansion ARR, i.e., you're getting 60-70% of your new ARR from expansion, uh, I think people are gonna say, wait a minute, you, you've got a broken new customer acquisition engine. And conversely, if you're only getting 10 or 20%, you're missing the opportunity to monetize your customer base. So I do think the Goldilocks principle is at work here, right?

So You know, just the other thing people ask me a lot, Dave, is, you know, are there particular metrics you use as a best practice to measure expansion ARR? And we've been talking about the mix, right, of your new ARR between new name customer acquisition and existing customer expansion. But for a multi-product company, I use something called product penetration ratio, Dave. That is, let's say I have 5 products or modules in my suite. It's like, oh, for my existing customers, do they have 1.2? Do they have 1.4? Do they have 2.2? And then I actually have always put spiffs on increasing that product penetration ratio. If we're at 1.4, let's see if we can get it to 2 by the end of the year. So we're putting an incentive on cross-sells and upsells. What do you think about that?

I like it. Of course, you need to have the products to cross and upsell, which I'm sure you do in that example. I think the other way to measure expansion ARR is indirectly through NRR, right? To just say, wait a minute, we're not going to look at what percent of new ARR comes from expansion, comes from the installed base. Instead, we're just going to look at how the installed base expands over time, which is what NRR is. And I think while I'd never measure sales on NRR, depending on your business model, it's a great metric for customer success because Because my friends at Netflix— not Netflix, NetSuite, sorry. My friends at NetSuite always used to give a CSM a portfolio of customers and say they're worth 100 units today, and your job is to make them be worth 115 a year from now. That's effectively measuring CS on NRR, much more so than expansion ARR.

In fact, one of the hot new metrics to have customer success to be able to identify those upsell and cross-sell opportunities is the customer success qualified lead, the CSQL. Nick Mehta at Gainsight talks about this all the time. It's like, give them a CSQL quota. So if you hand that to either the account management team or the sales team, it's already a warm upsell opportunity.

Yeah, I've always felt so. So I will say I go back many, many years saying that you need to view customer success. One of the metrics has got to be treating them as SDRs for expansion. In effect, the same thing, the CSQL, that we're saying, how many opportunities have you identified? in this case, not for new customer acquisition, but for expansion within the base. Uh, Ray, there's a question though that I have not hit you on yet, uh, which is who should own this in your experience? Who owns expansion ARR?

I'm going to answer this the same way I answer who owns revenue: the go-to-market team. And it might even go beyond the go-to-market team because marketing— they— well, let me back up. First of all, I think there should be a shared goal for what the expansion ARR is for this calendar year, calendar quarter. Marketing— how can you drive top-of-the-funnel engagement and interest from our existing customer base in whether it's new products or maybe new utilization techniques of the current software? Sales— sales definitely should be responsible for taking that qualified opportunity and nurturing it, or even identifying it if they have strategic accounts. And then customer success, as we just talked about, Not only are they responsible for onboarding, engaging, doing the QBR, but during the QBR, identify other potential business requirements and priorities the customer has, and see if they link to another product or additional usage for your product. So I think it's the entire go-to-market executive team, Dave.

Okay, very diplomatic answer there from Schenectady. Oh, I mean, sorry, the Upper East Side. Um, uh, in any case, for what it's worth, I lived on the Upper East Side when I lived in New York as well, so it's where I met my wife, in fact. So look, here's how I think about expansion ARR ownership. I'm going to treat it more like a diving competition, i.e., degree of difficulty. So if it's a low degree of difficulty dive, meaning it's relatively easy expansion ARR, I call this also fries with the burger. Hey, can I move you from the silver to the gold edition? Hey, the prices have gone up this year. I need to renew you at 104% of what you paid last year. Hey, I noticed there are more users than seats licensed, so we need to sell you some more seats to catch you back up. All of these are what I would call kind of low degree of difficulty, or fries with the burger, or easy expansion ARR opties. And I think those can either be sales or customer success, or even a dedicated renewals account manager, right? Where it gets hard— for example, at Host Analytics, we used to sell a planning module to the head of FP&A. And a consolidation module to the controller. So different buyers, different problems, different competitors, competitive bids. That's where you want sales to own it because while finance is going to call it expansion ARR, in reality it was a new sales cycle. And the rule that drives this is you never want to put your farmer against someone else's hunter. That's a great way to lose a deal.

Interesting. So you're saying sales gets the hard job and customer success gets the easy job.

Pretty much, pretty much in this case. I mean, look, the customer success has lots of hard jobs as well, but, but I don't want to make sales one of them, uh, unless you're running a very salesy customer success organization. Yeah.

By the way, I'd say one other thing. I think the product team, the product team should have some ownership of expansion ARR because there might be things that they can do regarding in-app experience. Maybe it's like Oh, did you know you could do this with our application? Or different opportunities to upgrade that buyer— I'm sorry, that user— while they're in the app. What do you think of that?

So I think it's a great point. And I think kind of now more than ever, that's a great point, Ray, because as you know, we're hitting hard times. It's no secret people are having trouble driving growth. They're looking back to their customer base to drive that growth, and they discovered that the product is not packaged to help them do that growth. Right? I worked with one company board meeting where somebody asked the VP of product management that very question, like, hey, to what extent are you responsible for expansion ARR? And the answer he said was none, zero. And we're like, oh no, this is a problem. Because you control pricing and packaging, right? You control whether new features are free or bundled into separate modules. You know, at Host Analytics, at one point, we built new products. And rather than drive a bunch of new ARR off them, we would use them primarily to So somebody's like, ah, I got oversold. I bought 100 seats. I only need 80. I want to drop my contract to 80. We'd say, wait a minute, we've got this new product coming out, this new add-on module. Why don't we hold you at 100 and do that? So sometimes it's not just about expansion, but it's about minimizing churn as well. So, but, but to answer your question, yeah, I think product management maybe During the boom-boom times of the past, didn't care so much about that. They didn't think so much about this. But going forward, yeah, they need to take some responsibility for, I would say, customer base expansion, not just expansion ARR, like whether it shrinks or expands and the degree one offsets the other. So, Ray, what do you think? Look, there's a metric that people talk about here that I don't love, frankly, but I'd love to hear your view on it. Hey, I'm CAC and the Churn Brothers are the Metrics Brothers. But expansion CAC, it makes me uncomfortable because I don't know if I can completely compartmentalize the cost. It's pretty easy to get my handle around the ARR, to say the customer acquisition cost of expansion. But, but what about, what about the cost of getting that ARR? Basically, Ray, what do you think about expansion CAC as a metric?

I love it, and I'm going to blame David Spitz for that. David Spitz was the person at KeyBank that did the annual survey, and he actually came up with expansion CAC to kind of look at the efficiency of that cross-sell and upsell motion.

Yeah.

So first of all, let's define what expansion CAC is. It tries to measure how much sales and marketing investment, and that would include customer success if they're involved, how many dollars of expense do you need to get $1 of expansion ARR, upsell or cross-sell? And if you look at the latest benchmarks, it's around $0.69 of sales and marketing investment to get $1 of expansion ARR, where new ARR is around $1.56. So you can see how much more efficient it is, Dave. And yes, anything worth doing is hard. If understanding how to gather the information to calculate expansion CAC was easy, everyone would be doing it. So here's my recommendation. And I was talking to Ben Murray about this last night. You just talk to the people involved. If you're smaller, who are involved in the customer management, customer expansion, how much time do you spend talking about our new products or trying to identify other users. So they say, I probably spend about 10% of my time. Or you ask the salesperson, how much time do you spend trying to upsell and cross-sell your install base? And just take that percentage, Dave, and use that as the proxy for what percentage of sales and marketing is being used to pursue expansion ARR. It's not perfect, but at least, I mean, And I'm sorry, I don't mean to go on, but we've only got 20 minutes in this podcast. But I can't stand talking to people to say, well, we got to put more and more focus on expansion because it's easier and it's cheaper. How do you know it's cheaper? You're not measuring it. How do you make that statement, Dave?

Yeah, I hear you, Ray. Obviously, I worry about the off part of it, just doing percentage allocations of time. Look, I think the metric itself is super meaningful in an old-school sales sells and CS expands. model, because then it's very clear who does what. But as soon as you— but of course, that— I don't want to put the cart in front of the horse. I don't want to make the metric easy to calculate at the expense of putting the wrong operating model in place. So I'm not arguing you should go to that model to improve the calculation. But as soon as you go to a more collaborative model where both sales and CS are working on expansion, ultimately you're going to have to allocate that time. And, and you could do that But, but it's going to have a big impact potentially on the cost of the metric. So I'm okay with expansion CAC in the end. I don't love it. The most important part to me, Ray, is to make sure you understand what you're looking at, because effectively you're taking an allocation of people's time, and sometimes that can be misleading. So I'll calculate it. I work on boards that calculate it. I'm not, you know, anti-expansion CAC as a metric. The blended CAC overall to me is rock solid. I know exactly what I'm looking at. And as soon as I go, look, my favorite part of expansion CAC is it tells me what my new logo CAC is, frankly. And while one's going to be surprisingly low, the other is going to be surprisingly high, typically.

Okay. You asked me a contentious question, right, that we don't quite agree on, but I always wanted to add value to our listening audience. So, Dave, how do you get more expansion ARR? What's that secret 2 or 3 things anyone can do to get expansion ARR?

Well, look, we could do— we could and probably should do a whole episode on that. But, but I can tell you, as we talked about earlier, it really should be everyone's job, not just sales or CS, to get this expansion ARR. How do you do it? I think there's a number of dimensions I think along. One is use case expansion. So say you sell a conversation intelligence system like Gong or Jiminy, and say you sell it to sales. Well, you could take that exact same product and sell it to customer support or sell it to customer success. And they can use it to record calls and coach members and analyze what people are talking about, right? So we've literally taken the exact same product and put it on a new use case. Another example is to, via product marketing, pricing and packaging, as we've talked about, more additions, more add-on products, use it to offset churn as well as drive expansion. Basically, anything we can do to help prevent shrinkage is important because we want net customer expansion to be greater than zero. Right? Net customer expansion is expansion ARR minus churn ARR. And if that's a negative number, then sales is constantly kind of fighting against the leaking bucket of ARR. We'd rather have that— look, the perfect world would be growing at 10% or 20%. I think your benchmarks say overall NRR runs around 104%, 105%. But, but we definitely want it to be greater than 100%, i.e., net customer expansion should be greater than zero. And the way we do that is through expanding products, Through pricing and packaging changes, through use case changes. Those are the 3 standard ways.

Well, at this pace, number one, we're not going to make our goal of making this a 20-minute podcast because we, like you said, we could do a whole second episode on expansion ARR. But I think we did a good job at covering the bases. Is there anything you want to end today with, Dave, for the listening audience?

Uh, no, Ray, you know, I think not bad for a pilot episode, and, uh, I look forward to doing the next one with you.

Dave, thank you so much for doing this. And to those people who made it through our 22 minutes of this episode, it would mean the world to us to go ahead and subscribe to SaaS Talk on your favorite podcasting app. Go ahead and give us that 5-star rating because Dave and I love you guys, so please love us back. And be ready for our next episode where, Dave, I think we're going to talk about pipeline generation, a really easy one.

Easy, easy. Okay, well, until next time, don't drive like Ray.

Vroom vroom, let's go!

Bye-bye, take care, see ya.

The Metrics Brothers AI, SaaS, and More is a production of the Metrics Brothers Growth and CAC and a member of the Benchmarket Podcast Network. By accessing this podcast, you acknowledge that the Metrics Brothers make no warranty, guarantee, or representation as to the accuracy or sufficiency of the information provided or the humor content of the jokes told. Ray, information, opinions, and recommendations presented are, according to our spouses, probably wrong and and provided for information purposes only. This podcast should not be considered professional or for that matter, unprofessional advice. We disclaim any and all liability for any direct, indirect, indirect, misdirect, incidental, special, ordinary, consequential, inconsequential, or other damages arising out of any use of, or God help you, reliance upon the information presented here. Ray Grothreich is based in New York City and available on X @rayreich. Dave Kellogg is based in Silicon Valley and available on X @kakellogg. Kellogg. Schedectity, which is French for unspellable, is not our actual production location. Thanks for listening.